March 25, 2019

Colorado Court of Appeals: Summary Judgment Reversed Where Non-Traditional Homeowners Suffered Loss in Residential Transaction

The Colorado Court of Appeals issued its opinion in Mid Valley Real Estate Solutions V, LLC v. Hepworth-Pawlak Geotechnical, Inc. on Thursday, August 1, 2013.

“Homeowner” for Purposes of Construction Negligence Action—Summary Judgment—Economic Loss Rule.

Defendants, Hepworth-Pawlak Geotechnical, Inc., Steve Pawlak, and Daniel E. Hardin (collectively, H-P), the project soils engineer; and S K Peightal Engineers, LTD (SKPE), the project structural engineer, challenged an order denying their motion for summary judgment on the negligence claim of plaintiff, Mid Valley Real Estate Solutions V, LLC (Mid Valley), a wholly-owned subsidiary of Alpine Bank (bank), the construction lender. The Court of Appeals affirmed and remanded the case with directions.

A developer entered into a written contract with H-P to analyze the soils on which houses would be built for resale. H-P’s report recommended a particular type of foundation. The developer’s general contractor entered into an oral contract with SKPE to provide structural engineering services, including foundation design. The general contractor built the house at issue according to H-P’s recommendations and SKPE’s design.

The developer couldn’t sell the house and eventually defaulted on the construction loan agreement with the bank. The default was resolved with a deed-in-lieu agreement. The bank received $355,000 and title to the house was transferred to Mid Valley, which entity was created to hold the house, its sole asset, for resale. The balance of the construction loan was forgiven.

Structural damage then began to appear, beginning with foundation cracks. Mid Valley sued defendants for negligence in failing to indentify expansive soils and specify an appropriate foundation and sought costs of repair.

The Court reviewed the economic loss rule and found that there is clearly an independent duty of care on the part of a builder in residential construction that renders the economic loss rule inapplicable in that context. This is not the case, however, in the commercial construction context.

The Court then looked to whether Mid Valley fell within the class of plaintiffs who may enforce this independent duty of care. It concluded that because the duty arises from the services provided and the residential nature of a project, the attributes of the owner harmed when the latent defect ripens does not limit the scope of the duty. Thus, while Mid Valley was not a traditional homeowner, allowing defendants to avoid liability for this reason would afford them a windfall resulting from the fortuity that the latent defect caused damage before Mid Valley sold the house. Accordingly, the denial of summary judgment was affirmed and the case was remanded for further proceedings.

Summary and full case available here.